This research project analyzes markets in which participants compete for trading partners, but instantaneous trade is not ensured. In these markets sellers are not only concerned about the price they can achieve, but also about the speed at which they can trade. Such a concern is absent in classical economics models where trade is immediate when the price is right.
An example of an imperfect market is the housing market, where sellers want to sell at a high price but are concerned that the process of finding a buyer might take half a year and longer. Such concerns for price and speed of trade are pervasive in other markets as well. Stores are concerned about their sales price and about their inventories' turn-around time, and employers want to hire workers at low wages but are concerned if they cannot quickly find someone to do the job.
Trading imperfections have traditionally been modeled as random search, i.e. traders meet randomly and even a desperate seller has few possibilities to speed up the trading process. Yet in many markets the traders have a competitive element that allows them to attract trading partners: The seller of a house can lower his asking price in order to induce more buyers to come and take a look at the house, stores advertise reduced prices for their products to attract customers, and firms compete in terms of employee satisfaction rankings and amenities as well as wages to attract applications by qualified workers. Therefore, this project combines classical elements of competition with the idea that people have to "search" for the right trading partner.
The analysis advances the theory of competitive search in order to address the following questions: 1. Who trades with whom in such markets? 2. Through which trading protocols do sellers compete when faced with trade frictions? 3. How do buyers react to the frictions if they can shop around at various sellers?
The first question concerns the trading patterns that we expect for these markets. It subsumes questions such as: Will high skilled workers work at machines of high quality? Are the best houses bought by the most desperate buyers? Under which conditions is the answer to these questions "Yes"? The project provides such conditions in a tight mathematical form that is helpful for our understanding of the interactions in these markets. These conditions also allow us to address secondary issues concerning e.g. the income spread of workers at different machines (occupations) and workers incentives to invest in skills.
The second question broadens the way in which sellers (employers) can compete for buyers (workers), and their consequences for the trading outcomes. In particular the efficiency of the market interaction is of interest, i.e. which conditions render simple pricing mechanisms optimal within the larger framework of competing mechanisms.
The third question broadens the analysis to allow buyers to shop around at several sellers or unemployed workers to apply to several employers. The focus is on the robustness of earlier finding as well as additional questions such as: Do workers apply enough? Do they apply to the right set of firms? Our framework allows us to investigate concerns that cannot be answered in standard models where workers only apply to at most one job.
